Breakeven Tanker Asset Analysis – What makes sense to buy?
Feb. 3, 2023
The disconnect between prevailing time charter rates and asset prices remains wide, as asset values continue to find support from inflationary pressures, healthy earnings momentum, and tight shipyard capacity, which in-turn have dissuaded owners from divesting out of existing tonnage as replacement costs are high. We are beginning to see a divergence in the relative value achieved from operation in mid-sized tankers compared to larger tonnage in response to shifting trade patterns.
To assess the disparity between charterers and owners’ positions, we evaluated estimated break-even time charter equivalent earnings over a 5-year investment period using today’s asset prices (Table 3.1). The calculation assumes: 1) current asset prices as entry point; 2) owner exits asset in 5 years at the historical average value of the asset at its then current age; 3) vessel-specific operating expenses, adjusted for inflation over the investment period and 4) debt financing in-line with current market dynamics. With these parameters in place, we solve for the break-even rate required over the 5-year period for the owner to generate a 10% IRR.
The results of this analysis revealed that in the NB Re-sale category, an owner investing in a VLCC NB would require US $50,717/day in order to meet the 10% hurdle over the 5-year evaluation period (Figure 3.5). This compares to McQuilling’s forecast for Eco+scrubber VLCCs to earn US $49,263/day over the same period. In the 5-year-old segment, the break-even required to meet the 10% hurdle is estimated to be US $46,961/day, while our forecasts for an Eco average to US $44,735/day over the period.
In both scenarios, a charterer would be underwater on the contract over the five years. As such, we are skeptical that without a correction in asset valuations, or owners lowering their hurdle rates, there will be an absence of substantive amount of long-term newbuild projects. The second analysis demonstrates that older tonnage presents significantly better value if the buyer can secure prompt delivery.
However, for the remaining vessel segments, our analysis shows that unlike 2022, there is potential for project deals to be done basis the break-even calculations and our corresponding forecasts. We see relative value for vessel segments in the DPP (excluding VLCCs) and all CPP segments. This is consistent with our view that the small and mid-sized tanker segments will have potential to outperform given their relative flexibility in an environment that could involve more regionalized trading patterns in the new year.
Figure 3.5 Break-Even Rates vs. McQuilling Forecasts
Source: McQuilling Services
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